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With the Bank of England Base Rate (BBR) expected to fall over the next year, many landlords are considering a tracker rate over a fixed. What are the benefits and drawbacks of tracker rates, and are they the most cost-effective?

Having seen the end of the streak of Base Rate rises, and with inflation falling to a lower-than-expected level in October, many experts now predict BBR to decrease by mid-2024, although others (including Andrew Bailey) have referenced 2025. Consequently, you’re now faced with a choice: do you fix into a competitive rate or take a tracker and hope to see your mortgage repayments fall with the Base Rate?

Both have plenty of benefits and drawbacks, but the most important thing is to speak to an expert broker who can cost up the best option for your circumstances.

 

Benefits of tracker rates

Despite typically being less popular with landlords, tracker mortgage products offer many benefits. For one, some tracker rates come with no Early Repayment Charges, giving property investors flexibility when it comes to their mortgage rate and the ability to repay their loans without added fees. Of course, the most obvious benefit is that when the rate your deal is tracking comes down, you will see a drop in your monthly mortgage payments.

You can also access a ‘full term’ tracker rate to last the entire mortgage term. Not having to remortgage every few years could save you thousands when you factor in administration costs.

 

Drawbacks of tracker rates

In contrast, tracker rates have a few drawbacks that leave many choosing a fixed-rate option instead. Most notably, you have less financial stability. If the product your rate is tracking increases, so will your monthly mortgage payments. This financial uncertainty can be a strain, and you’ll need to consider that there is no cap on how high interest rates can go, or how quickly.

With the uncertainty that comes with a tracker rate, lenders will have much tighter rental calculations, so you’re less likely to be able to borrow more per pound of rent than you would with a fixed rate. Consequently, securing a tracker deal can be more difficult.

 

How much could I save with a tracker rate?

If you’re currently reviewing your remortgage options or waiting for further mortgage rate reductions in the new year (as many landlords are), then it’s essential to be aware of how much you could be saving with a fixed or tracker rate option.

For example, on a 2-year product, there is only a £129 difference in the total two-year cost between a fixed and tracker rate:

 

Fixed at 5.63%* for 2 years at 75% LTV

 

Loan

£200,000

Lender Arrangement Fee (added to the loan)

£1,999

Monthly payments

£948

Yearly payments

£11,373

2-year cost

£24,744

 

Discounted at 5.94% (BBR + 0.69%)* 2-year tracker at 75% LTV

 

Loan

£200,000

Lender Arrangement Fee (added to the loan)

£995

Monthly payments

£995

Yearly payments

£11,939

2-year cost

£24,873


In contrast, securing a 5-year fixed rate is currently £14,800 more cost-effective than taking a full-term tracker:

Fixed at 5.24*% for 5 years at 75% LTV

 

Loan

£200,000

Fee

£0

Monthly payments

£873

Yearly payments

£10,480

5-year cost

£52,400

 

Tracker at 6.72% (SVR – 1.67%)* Full term at 75% LTV

 

Loan

£200,000

Fee

£0

Monthly payments

£1,120

Yearly payments

£13,440

5-year cost

£67,200

 

*Rates are for illustrative purposes only and subject to change. For an accurate quote of the rates you can access, please contact our expert team.

Of course, the illustrations above don’t account for any BBR changes we could see over the next few years. With such a slight difference in the overall costs, especially in the 2-year rates, it’s understandable that many landlords prefer to err on the side of caution with a fixed deal. Furthermore, the last few years have been particularly volatile for the mortgage market, and therefore, more property investors are looking for financial stability.

 

What’s next?

To see how much you could save with a new fixed or tracker rate, or to discuss your property finance options, get in touch with our expert brokers on 0345 345 6788 or submit an enquiry here.

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